Analysis: Global Oil Markets Weaken Due to Sluggish Demand Excess By Reuters

By Robert Harvey and Natalie Grover

Global physical oil markets are showing signs of weakness due to reduced refinery demand and an oversupply of crude, which could lead to further declines in benchmark crude futures, according to traders and analysts.

This decline is influenced by high interest rates and inflation dampening both consumer and industrial demand, particularly in Europe, while supply is increasing from non-OPEC countries such as the United States. This scenario may reinforce arguments for OPEC+ to maintain its production limits at their upcoming meeting on June 1.

Despite an increase in crude intake capacity following seasonal maintenance, refinery demand remains soft. Saxo Bank analyst Ole Hansen commented that the expected rise in demand has not materialized in light of rising refinery capacities.

"Consumers are under pressure from high interest rates and inflation, coupled with trade tensions and a challenging geopolitical landscape," he noted.

The weakness is particularly pronounced in the North Sea, which produces crude grades that help set the benchmark for futures and price a significant portion of global oil output. On May 14, the price differential for North Sea Forties crude dropped to a discount of 97 cents compared to dated Brent, the widest gap since January 2023, according to S&P Global Commodity Insights.

Additionally, WTI Midland cargoes in Northwest Europe were assessed at 69 cents below dated Brent on May 13, marking the lowest valuation since WTI joined the Brent benchmark last May. Sparta Commodities analyst Neil Crosby remarked on the relatively muted demand, suggesting that substantial crude inventories may be delaying purchases and putting pressure on physical pricing.

The supply of light, low-sulphur crudes from regions such as West Africa and the United States continues to rise, compounding the issue. The current market structure reflects this; for instance, short-term Brent swaps indicate that crude meant for immediate delivery is trading at a $1.07 per barrel discount to the July contract, in contrast to a $1.64 premium a month prior. This condition, known as contango, signals an oversupply and weak demand.

In the United States, physical markets have also softened, with refinery processing rates remaining below seasonal averages despite the conclusion of maintenance season. Prices for Louisiana Light Sweet crude dropped to a three-week low, reflecting ongoing challenges. The U.S. Energy Information Administration reported that the four-week average for refinery utilization was at 88.7% for the week ending May 10, down from 91.2% for the same period last year. Concurrently, demand proxies for U.S. gasoline and distillate products were 4-5% below 2023 levels.

Global refinery profit margins have declined, partly due to a drop in diesel values, which are crucial for industrial and transportation sectors. PVM analyst Tamas Varga indicated that lower margins suggest that refiners are producing excess fuel amidst weak consumer and industrial demand. This has led Asian refiners to reduce crude processing in May, with potential further cuts on the horizon, which could exacerbate crude demand issues.

Paul Sankey, a U.S. oil analyst, pointed out that the reduction in Asian refining activity indicates a softer oil market, noting that Asia is often the first region to reduce output when markets are oversupplied. He anticipates that OPEC will likely continue its voluntary cuts in the upcoming meeting.

Weaker refining demand in Asia has contributed to a decline in Middle Eastern crude prices, with Benchmark Dubai reaching its lowest point in nearly two months. Simultaneously, an oversupply of Nigerian crude has forced sellers to lower prices for May cargoes in an effort to clear excess stock.

An unnamed Asian crude buyer expressed hesitation in purchasing West African and WTI crude until prices decline further, emphasizing the necessity to find markets for the surplus oil.